Stage is shifting for energy markets

Houston Chronicle • June 22, 2013 • by Dr. Nansen G. Saleri

The recent OPEC meeting in Vienna exposed the internal tensions among its member states - most notably Saudi Arabia and Iran signaling the transition into a complex energy era.

Two recent events in America offer additional proof with cascading implications worldwide: the Obama administration's approval of a $10 billion facility in Texas for natural gas exports and first-quarter results for Tesla Motors, the California-based electric car company showing its first-ever profits.

The entry of natural gas into the transportation segment via electric cars is a major milestone on the road to U.S. energy independence and delivers a reality check to the Organization of the Pertroleum Exporting Countries. The Texas export facility signals a not-so-subtle acceptance of U.S. willingness to participate in a high-stakes game of energy chess alongside Russia, China, OPEC and others. In doing so, President Barack Obama made his move, acknowledging that the risks for the U.S. by "leading from behind" in a fast-paced energy world are unacceptable.

International Energy Agency projects North American production to rise by 3.9 million barrels a day between 2012 and 2018 as compared with a moderate growth in OPEC.

Spare capacity is expected to balloon to 7.7 percent of global demand by 2015 - a considerably optimistic forecast due to several downside risks related to shale production. Yes there will be more oil, but not as much.

Current thinking views global energy markets as a bicentric theater ruled by OPEC and North America, the latter blessed with the tailwinds of new technologies and agile capital. The reality is different.

The world energy markets are multicentric and likely to become even more so in the future. Russia, China, not to mention Brazil or Argentina, can mimic North America's experience with oil and gas (conventional or shale) at varying levels of success. The reasons lie in the new energy landscape where access to new technologies, intellectual property, or capital transcends beyond national, geographic or political boundaries, notwithstanding outlier politics (i.e. Iran, Venezuela). And even that cannot be an assumption for the future.

As for OPEC, it is trending toward being a sum that is less than its parts. Its future relevance will depend more on the performance of individual states than on the diminishing synergies of the organization. Saudi Arabia's dominance within OPEC will strengthen due to its vast hydrocarbon resources (including shale) and its capability to go after them.

Russia is the world's leading oil producer at 10.5 million barrels a day, up 25 percent since 1991, the year of the Soviet Union's breakup. Rosneft may arguably reflect best the resurgence and ambitions of the Russian oil industry as it topped 4.7 million barrels per day in production during 2012, overtaking ExxonMobil as the world's largest oil company. Yet inefficiencies remain. Thus paradoxically Russia's eminence in oil and gas will grow commensurate with the ability of its energy enterprises to match the efficiency of Western counterparts.

China is under intense pressure to grow its energy portfolio to sustain its economic growth. Its national oil companies purchased an estimated $35 billion of gas assets in 2012 and the recent acquisition of the Canadian oil and gas company Nexen is a precursor of how China will leverage its capital advantage as its main pawn in global chess.

One can argue that new technologies and market forces create a supply-side advantage. Does this signal a collapse of oil prices to $50 or even less? Not so. The primary driver for sustaining a stable price range of around $80-$120/barrel is the growing upwardly mobile masses across the globe. China and India will add several hundred million people to the middle class over the coming decade. Hence the continuing demand that will preclude a sharp retreat in prices.

The overused refrain that the era of easy oil is over calls for a rethink. Perhaps easy is gone, but difficult has now become easy, thanks to new technologies. The U.S., Russia, China, as well as the EU, have a lot at stake. This bodes well for consumers worldwide.

What happened in North America can be replicated in other (not all) parts of the world. The globalization of energy markets is gaining momentum with outcomes that favor more stability in prices and a visible advantage to the U.S. Huge rewards await countries that can outperform North America's success. The most crucial pawn in the global chess game is what markets like most: freedom to innovate. That's the real message to world leaders.